Monday, September 8, 2008

Freddie Mac & Fannie Mae get US Government Bailout

The US government has bailed out Freddie Mac and Fannie May, the two struggling companies that underpin the US mortgage market.

The move is generally seen as good for the property market. As the Times comments; "The US Government’s decision to guarantee the two groups’ survival is good news for British banks and, in turn, British homeowners. British banks have billions of dollars invested in bonds that are insured by Freddie and Fannie and they could have translated into huge losses if either group had gone under – leaving the banks with even less money to make available for mortgages. "

The companies financed more than 80 per cent of US house purchases so far this year. Between them they are responsible for $5,500 billion worth of residential mortgages, just under half the value of America’s $12,000 billion worth of outstanding home loans.

The government have insisted, however, on big changes at the top of the two companies. Daniel Mudd and Richard Syron, the current chief executives of Fannie and Freddie respectively, will leave their roles. Herb Allison, formerly of Merrill Lynch, becomes chief executive of Fannie. David Moffitt, from US Bancorp, moves to Freddie.

The markets seems to have taken the news well with initial market surges in South East Asian and European stock indices. Owners of shares in the companies may not be as happy, however, as analysts expect them to trade as 'penny stocks' in the wake of the move. See report from Forbes here.